Question - Matterson Electronics has just developed a new solar device that will be targeted to the green economy to provide charging capabilities using the power of the sun for electronic devices especially in third world countries where electricity supplies are unstable and expensive. Market research and cost studies have provided the following information.
a. New equipment will be purchased at a cost of $ 515,000 and will have a 10 year useful life. The salvage value at the end of the useful life is $15,000.
b. Sales for the next 10 years is as follows Year Sales in units 1 12,000 2 18,000 3 26,000 4-10 29,000
c. Production and sales of the device will require working capital of $ 60,000 to finance accounts receivable, inventories and day to day cash needs. This working capital is released at the end of the project's life. The machine will have to be refurbished in year 6 for $125,500 to maintain production efficiencies for the final 4 year of operations. This refurbishment will be expensed in the year it occurs.
d. The devise will sell for $50 per unit. The variable cost for production, administration and sales would be $ 25 per unit.
e. Fixed cost for salaries, maintenance property taxes and other miscellaneous operating cost inclusive of depreciation on the totals $182,300 per year.(Depreciation on the project is calculated using the straight line method)
f. To gain rapid entry into the market, the company will advertise intensely. The projected advertising cost will be as follows: Year Amount of yearly advertising 1 $220,000 2 200,000 3 150,000 4-10 120,000
g. Matterson Electronics board of directors has specified a required rate of return of 14% on all new projects
Required
1. Compute the net cash flows anticipated from the sale of the devices for each year over the next 10 years.
2. Using the information above compute the Net Present Value of the proposed investment. Would you recommend that Matterson Electronics accept the device as a new project?